Loans and Allowance for Loan Losses | 3. Loans and Allowance for Loan Losses June 30, September 30, 2016 2015 (In thousands) Real estate mortgage: 1-4 family residential $ 180,076 $ 181,873 Commercial 198,577 172,995 Multifamily residential 18,804 21,647 Residential construction 23,616 19,723 Commercial construction 41,814 15,548 Land and land development 11,545 11,061 Commercial business loans 37,692 32,574 Consumer: Home equity loans 20,348 19,423 Auto loans 4,853 5,452 Other consumer loans 2,173 2,159 Gross loans 539,498 482,455 Undisbursed portion of construction loans (38,248) (18,599) Principal loan balance 501,250 463,856 Deferred loan origination fees and costs, net (202) (120) Allowance for loan losses (6,969) (6,624) Loans, net $ 494,079 $ 457,112 During the nine-month period ended June 30, 2016, there was no significant change in the Company’s lending activities or methodology used to estimate the allowance for loan losses as disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2015. At June 30, 2016 and September 30, 2015, the recorded investment in consumer mortgage loans collateralized by residential real estate properties in the process of foreclosure was $ 934,000 806,000 Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Recorded Investment in Loans: Principal loan balance $ 180,076 $ 198,577 $ 18,804 $ 27,182 $ 11,545 $ 37,692 $ 27,374 $ 501,250 Accrued interest receivable 536 559 40 73 33 168 59 1,468 Net deferred loan origination fees and costs 197 (270) (17) (124) 6 17 (11) (202) Recorded investment in loans $ 180,809 $ 198,866 $ 18,827 $ 27,131 $ 11,584 $ 37,877 $ 27,422 $ 502,516 Recorded Investment in Loans as Evaluated for Impairment: Individually evaluated for impairment $ 4,067 $ 6,417 $ - $ - $ - $ 232 $ 286 $ 11,002 Collectively evaluated for impairment 176,374 192,449 18,827 27,131 11,584 37,645 27,108 491,118 Acquired with deteriorated credit quality 368 - - - - - 28 396 Ending balance $ 180,809 $ 198,866 $ 18,827 $ 27,131 $ 11,584 $ 37,877 $ 27,422 $ 502,516 The following table provides the components of the recorded investment in loans as of September 30, 2015: Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Recorded Investment in Loans: Principal loan balance $ 181,873 $ 172,995 $ 21,647 $ 16,672 $ 11,061 $ 32,574 $ 27,034 $ 463,856 Accrued interest receivable 552 454 47 23 30 95 58 1,259 Net deferred loan origination fees and costs 283 (294) (21) (63) 8 (28) (5) (120) Recorded investment in loans $ 182,708 $ 173,155 $ 21,673 $ 16,632 $ 11,099 $ 32,641 $ 27,087 $ 464,995 Recorded Investment in Loans as Evaluated for Impairment: Individually evaluated for impairment $ 4,391 $ 7,041 $ - $ - $ - $ 222 $ 290 $ 11,944 Collectively evaluated for impairment 177,873 166,114 21,673 16,632 11,099 32,419 26,767 452,577 Acquired with deteriorated credit quality 444 - - - - - 30 474 Ending balance $ 182,708 $ 173,155 $ 21,673 $ 16,632 $ 11,099 $ 32,641 $ 27,087 $ 464,995 Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Ending Allowance Balance Attributable to Loans: Individually evaluated for impairment $ 3 $ - $ - $ - $ - $ - $ 4 $ 7 Collectively evaluated for impairment 315 5,121 111 743 313 258 101 6,962 Acquired with deteriorated credit quality - - - - - - - - Ending balance $ 318 $ 5,121 $ 111 $ 743 $ 313 $ 258 $ 105 $ 6,969 An analysis of the allowance for loan losses as of September 30, 2015 is as follows: Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Ending Allowance Balance Attributable to Loans: Individually evaluated for impairment $ 9 $ - $ - $ - $ - $ - $ 5 $ 14 Collectively evaluated for impairment 435 4,327 156 551 369 678 94 6,610 Acquired with deteriorated credit quality - - - - - - - - Ending balance $ 444 $ 4,327 $ 156 $ 551 $ 369 $ 678 $ 99 $ 6,624 An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2016 is as follows: Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 286 $ 4,595 $ 157 $ 651 $ 345 $ 625 $ 92 $ 6,751 Provisions 113 526 (46) 92 (32) (358) 8 303 Charge-offs (114) - - - - (10) (20) (144) Recoveries 33 - - - - 1 25 59 Ending balance $ 318 $ 5,121 $ 111 $ 743 $ 313 $ 258 $ 105 $ 6,969 An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2016 is as follows: Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 444 $ 4,327 $ 156 $ 551 $ 369 $ 678 $ 99 $ 6,624 Provisions (69) 794 (45) 192 (56) (411) 23 428 Charge-offs (170) - - - - (10) (77) (257) Recoveries 113 - - - - 1 60 174 Ending balance $ 318 $ 5,121 $ 111 $ 743 $ 313 $ 258 $ 105 $ 6,969 An analysis of the changes in the allowance for loan losses for the three months ended June 30, 2015 is as follows: Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 457 $ 4,109 $ 163 $ 455 $ 316 $ 886 $ 128 $ 6,514 Provisions 300 (254) 7 94 59 3 (1) 208 Charge-offs (156) - - - - (48) (30) (234) Recoveries 14 - - - - - 18 32 Ending balance $ 615 $ 3,855 $ 170 $ 549 $ 375 $ 841 $ 115 $ 6,520 An analysis of the changes in the allowance for loan losses for the nine months ended June 30, 2015 is as follows: Residential Commercial Multifamily Construction Land & Land Commercial Consumer Total (In thousands) Changes in Allowance for Loan Losses: Beginning balance $ 577 $ 3,808 $ 146 $ 443 $ 302 $ 795 $ 179 $ 6,250 Provisions 298 47 24 106 73 93 (14) 627 Charge-offs (299) - - - - (48) (103) (450) Recoveries 39 - - - - 1 53 93 Ending balance $ 615 $ 3,855 $ 170 $ 549 $ 375 $ 841 $ 115 $ 6,520 The following table presents impaired loans individually evaluated for impairment as of June 30, 2016 and for the three and nine months ended June 30, 2016 and 2015. At June 30, 2016 Three Months Ended June 30, Nine Months Ended June 30, Recorded Unpaid Related 2016 2016 2015 2015 2016 2016 2015 2015 (In thousands) Loans with no related allowance recorded: Residential real estate $ 4,221 $ 4,625 $ - $ 4,929 $ 36 $ 5,643 $ 36 $ 5,252 $ 109 $ 5,663 $ 109 Commercial real estate 6,417 6,486 - 6,508 48 6,047 55 6,646 148 5,842 168 Multifamily - - - - - - - - - - - Construction - - - - - - - - - - - Land and land development - - - - - - - - - - - Commercial business 232 223 - 248 2 305 - 299 4 242 1 Consumer 188 192 - 197 1 233 1 202 4 243 4 $ 11,058 $ 11,526 $ - $ 11,882 $ 87 $ 12,048 $ 92 $ 12,399 $ 265 $ 11,990 $ 282 Loans with an allowance recorded: Residential real estate $ 80 $ 78 $ 3 $ 72 $ - $ 73 $ - $ 30 $ - $ 129 $ - Commercial real estate - - - - - 22 - - - 9 - Multifamily - - - - - - - - - - - Construction - - - - - - - - - - - Land and land development - - - - - - - - - - - Commercial business - - - - - 12 - - - 5 - Consumer 98 98 4 83 - 93 - 78 - 91 - $ 178 $ 176 $ 7 $ 155 $ - $ 200 $ - $ 108 $ - $ 234 $ - Total: Residential real estate $ 4,301 $ 4,703 $ 3 $ 5,001 $ 36 $ 5,536 $ 36 $ 5,282 $ 109 $ 5,792 $ 109 Commercial real estate 6,417 6,486 - 6,508 48 6,069 55 6,646 148 5,851 168 Multifamily - - - - - - - - - - - Construction - - - - - - - - - - - Land and land development - - - - - - - - - - - Commercial business 232 223 - 248 2 317 - 299 4 247 1 Consumer 286 290 4 280 1 326 1 280 4 334 4 $ 11,236 $ 11,702 $ 7 $ 12,037 $ 87 $ 12,248 $ 92 $ 12,507 $ 265 $ 12,224 $ 282 The Company recognized $ 5,000 Recorded Unpaid Related (In thousands) Loans with no related allowance recorded: Residential real estate $ 4,681 $ 5,245 $ - Commercial real estate 7,041 7,079 - Multifamily - - - Construction - - - Land and land development - - - Commercial business 222 282 - Consumer 210 214 - $ 12,154 $ 12,820 $ - Loans with an allowance recorded: Residential real estate $ 9 $ 9 $ 9 Commercial real estate - - - Multifamily - - - Construction - - - Land and land development - - - Commercial business - - - Consumer 80 80 5 $ 89 $ 89 $ 14 Total: Residential real estate $ 4,690 $ 5,254 $ 9 Commercial real estate 7,041 7,079 - Multifamily - - - Construction - - - Land and land development - - - Commercial business 222 282 - Consumer 290 294 5 $ 12,243 $ 12,909 $ 14 Nonperforming loans consist of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at June 30, 2016: Nonaccrual Loans 90+ Total (In thousands) Residential real estate $ 1,686 $ - $ 1,686 Commercial real estate 1,671 - 1,671 Multifamily - - - Construction - - - Land and land development - - - Commercial business 135 - 135 Consumer 173 - 173 Total $ 3,665 $ - $ 3,665 The following table presents the recorded investment in nonperforming loans at September 30, 2015: Nonaccrual Loans 90+ Total (In thousands) Residential real estate $ 1,923 $ 155 $ 2,078 Commercial real estate 1,855 - 1,855 Multifamily - - - Construction - - - Land and land development - - - Commercial business 210 94 304 Consumer 165 3 168 Total $ 4,153 $ 252 $ 4,405 The following table presents the aging of the recorded investment in past due loans at June 30, 2016: 30-59 60-89 90 + Total Current Total (In thousands) Residential real estate $ 2,145 $ 736 $ 1,131 $ 4,012 $ 176,797 $ 180,809 Commercial real estate - 49 94 143 198,723 198,866 Multifamily - - - - 18,827 18,827 Construction - - - - 27,131 27,131 Land and land development 371 - - 371 11,213 11,584 Commercial business 6 - 37 43 37,834 37,877 Consumer 88 7 26 121 27,301 27,422 Total $ 2,610 $ 792 $ 1,288 $ 4,690 $ 497,826 $ 502,516 The following table presents the aging of the recorded investment in past due loans at September 30, 2015: 30-59 60-89 90 + Total Current Total (In thousands) Residential real estate $ 3,635 $ 1,419 $ 1,530 $ 6,584 $ 176,124 $ 182,708 Commercial real estate 1,098 113 139 1,350 171,805 173,155 Multifamily 504 - - 504 21,169 21,673 Construction - - - - 16,632 16,632 Land and land development 253 - - 253 10,846 11,099 Commercial business 15 - 303 318 32,323 32,641 Consumer 81 14 32 127 26,960 27,087 Total $ 5,586 $ 1,546 $ 2,004 $ 9,136 $ 455,859 $ 464,995 The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic conditions and trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings: Special Mention: Substandard: Doubtful: Loss: Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. Residential Commercial Multifamily Construction Land and Land Commercial Consumer Total (In thousands) Pass $ 175,181 $ 192,184 $ 18,827 $ 27,027 $ 11,343 $ 37,742 $ 27,194 $ 489,498 Special Mention 446 - - 104 - - 3 553 Substandard 5,052 6,682 - - 241 135 221 12,331 Doubtful 130 - - - - - 4 134 Loss - - - - - - - - Total $ 180,809 $ 198,866 $ 18,827 $ 27,131 $ 11,584 $ 37,877 $ 27,422 $ 502,516 As of September 30, 2015, the recorded investment in loans by risk category was as follows: Residential Commercial Multifamily Construction Land and Land Commercial Consumer Total (In thousands) Pass $ 175,662 $ 160,224 $ 21,673 $ 16,632 $ 11,079 $ 32,335 $ 26,793 $ 444,398 Special Mention 799 5,342 - - - 96 13 6,250 Substandard 5,871 7,589 - - 20 173 274 13,927 Doubtful 376 - - - - 37 7 420 Loss - - - - - - - - Total $ 182,708 $ 173,155 $ 21,673 $ 16,632 $ 11,099 $ 32,641 $ 27,087 $ 464,995 Troubled Debt Restructurings Modification of a loan is considered to be a troubled debt restructuring (“TDR”) if the debtor is experiencing financial difficulties and the Company grants a concession to the debtor that it would not otherwise consider. By granting the concession, the Company expects to obtain more cash or other value from the debtor, or to increase the probability of receipt, than would be expected by not granting the concession. The concession may include, but is not limited to, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date or reduction of the face amount or maturity amount of the debt. A concession will be granted when, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest at the original stated rate. A concession may also be granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. The Company’s determination of whether a loan modification is a TDR considers the individual facts and circumstances surrounding each modification. Loans modified in a TDR may be retained on accrual status if the borrower has maintained a period of performance in which the borrower’s lending relationship was not greater than ninety days delinquent at the time of restructuring and the Company determines the future collection of principal and interest is reasonably assured. Loans modified in a TDR that are placed on nonaccrual status at the time of restructuring will continue on nonaccrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms of at least six consecutive months. Accruing Nonaccrual Total (In thousands) June 30, 2016: Residential real estate $ 2,615 $ - $ 2,615 Commercial real estate 4,746 1,576 6,322 Commercial business 97 124 221 Consumer 113 - 113 Total $ 7,571 $ 1,700 $ 9,271 September 30, 2015: Residential real estate $ 2,767 $ 110 $ 2,877 Commercial real estate 5,186 1,523 6,709 Commercial business 12 - 12 Consumer 125 - 125 Total $ 8,090 $ 1,633 $ 9,723 Number of Pre- Post- (Dollars in thousands) June 30, 2016: Three Months Ended June 30, 2016: Commercial real estate 1 $ 94 $ 131 Commercial business 1 97 97 Total 2 $ 191 $ 228 Nine Months Ended June 30, 2016: Residential real estate 5 $ 181 $ 247 Commercial real estate 1 94 131 Commercial business 3 186 216 Total 9 $ 461 $ 594 June 30, 2015: Three Months Ended June 30, 2015: Consumer 1 $ 3 $ 3 Total 1 $ 3 $ 3 June 30, 2015: Nine Months Ended June 30, 2015: Residential real estate 2 $ 165 $ 172 Consumer 1 3 3 Total 3 $ 168 $ 175 For the TDRs listed above, the terms of modification included deferral of contractual principal and interest payments, reduction of the stated interest rate and extension of the maturity date where the debtor was unable to access funds elsewhere at a market interest rate for debt with similar risk characteristics. The Company had not committed to lend any additional amounts as of June 30, 2016 to customers with outstanding loans classified as TDRs. At September 30, 2015, the Company had a commitment to lend $ 2,000 Principal in the amount of $ 51,000 During the nine-month periods ended June 30, 2016 and 2015, the Company did not have any TDRs that were modified within the previous twelve months and for which there was a payment default. Loan Servicing Rights The Company originates loans to commercial customers under the SBA 7(a) program. During the fiscal year ending September 30, 2016, the Company began selling the guaranteed portion of the commercial SBA 7(a) loans with servicing retained. Loan servicing rights on originated commercial SBA 7(a) loans that have been sold are initially recorded at fair value. Capitalized servicing rights are then amortized in proportion to and over the period of estimated net servicing income. Impairment of servicing rights is assessed using the present value of estimated future cash flows. The aggregate fair value of loan servicing rights at June 30, 2016 approximated its carrying value. A valuation model employed by an independent third party calculates the present value of future cash flows and is used to estimate fair value at the date of sale and on a quarterly basis for impairment analysis purposes. Management periodically compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. Key assumptions used to estimate the fair value of the loan servicing rights include the discount rate and prepayment speed assumptions. For purposes of impairment, risk characteristics such as interest rate, loan type, term and investor type are used to stratify the loan servicing rights. Impairment is recognized through a valuation allowance to the extent that fair value is less than the carrying amount. Changes in the valuation allowance are reported in net gain on sales of loans in the consolidated statements of income. The unpaid principal balance of commercial SBA 7(a) loans serviced for others was $ 10.7 35,000 62,000 34,000 69,000 (In thousands) Balance, beginning of period $ - Servicing rights resulting from transfers of loans 282 Amortization - Change in valuation allowance - Balance, end of period $ 282 Residential mortgage loans originated for sale in the secondary market continue to be sold with servicing released. |